Indian Hotels boardroom rebellion: Are the Tatas clasping straws in the wind?

That the independent directors lavished praise on the unceremoniously ousted chairman of the Tata group investment vehicle Tata Sons Ltd, Cyrus Mistry, must make the Tatas sit up, read the tea leaves and ponder.

The independent directors of Satyam Computers Ltd about eight years ago were caught napping when the wily Ramalinga Raju was busy inflating his company’s sales and profits but Indian Hotel independent directors obviously have been perceptive enough to observe the difference in the approach of Ratan Tata and his successor Cyrus Mistry. That they chose not to toe the Tata line and not allow prejudice against the young Mistry colour their judgments is commendable.

Ratan Tata sought to put Mistry in the doghouse for the dwindling fortunes of Indian Hotels. The independent directors have bluntly called his bluff and commended Mistry for his rearguard action in pulling the chestnut out of fire.

Tatas seems to be caught in a time warp. They haven’t learnt lessons from other family controlled companies in India many of whom run a tight ship with a stranglehold on the equity of the operating companies.

DLF the real estate major is controlled by the KP Singh family which has about 75 percent stake in the company. Ditto for WIPRO in which its promoter Azim Premji once upon a time had a vice-like grip with over 80 percent stake. He relented a wee bit when the market regulator the SEBI read the riot act and asked all listed companies to ensure a minimum 25 percent public shareholding. He accomplished this by cleverly propping up a few public charitable trusts to which he graciously transferred some of his holdings gratis. He knew smugly that the trustees in these trusts would do his bidding when push came to shove. One can go on but this will suffice. But Tatas have allowed to grow grass under their feet.

In a perceptive write-up in Mint dated 3rd November 2016 titled, Who owns how much in the Tata Group, it is pointed out that Mistry might have been ousted from Tata Sons Ltd but he remains the non-executive director cum chairman in many of the Tata group operating companies like Tata Motors, Tata Power, Tata Steel, Indian Hotels Co. Ltd, Tata Chemicals Ltd and Titan Co.

Tata Sons - the family investment vehicle’s - stake in most of these companies range from 22 percent to 31 percent not enough to ward off any incipient rebellion or takeover threats even though to be fair to the Tatas they have been voicing their concern over their meagre equity stake in the operating companies belonging to the group. Tatas have got it right only in one group company---Tata Consultancy Services Ltd, which was carved out of Tata Sons a decade or so ago so as to make it a listed company and reap tremendous benefits that go with listing. As much as 73 percent is what Tata Sons owns in TCS.

Most of these companies have in fact outgrown their dependence on Tata Sons with an ability to access the capital market independently. In Indian Hotels, Tata Sons has but a 39 percent stake which while being enough to block a special resolution in general meetings inimical to the Tata family, is simply not enough in the boardroom muscle flexing. The SEBI’s obsession with independent directors also seems to have conspired to work against the Tatas insofar as Indian Hotels is concerned.

Are Tatas then reduced to the status of our ex-maharajas with just the trappings of royalty? To be sure, Tata Sons’ is a formidable balance sheet giving an impressive EPS year after year and an equally impressive book value per share but that is not enough to call the group companies their own stricto senso. The group companies are charged royalty by Tata Sons Ltd in a manner that is a throwback to Nawabs paying court and financial obeisance to maharajas. To be sure, all except Indian Hotels use the word ‘Tata’ as part of their company name but one wonders whether the royalty extracted is well deserved.

Tatas would command a real control over their group companies beyond extracting royalty from them only if Tata Sons comes to acquire close to 50 percent equity stake in them, period. Otherwise the operating companies whose turnover and asset size are country-miles ahead of Tata Sons would look askance at the latter. Indeed, Tatas cannot afford to brush the issue of meagre shareholdings in the group companies under the carpet. They cannot bury their heads in the sand ostrich-like. They must read the Indian Hotels rebellion tea leaves carefully.